An adjustable rate mortgage (ARM) ranks among the popular types of home loans available to qualified borrowers. An adjustable rate mortgage is just one of a variety of mortgage loans offered by lenders. If you plan to purchase a house, investment property, or refinance, it may be a good option for you.
Read on to learn:
- what an ARM loan is,
- when to use it,
- what most lenders look for when you apply, and
- how to find the right adjustable rate mortgage lender.
What are Adjustable Rate Mortgage Loans?
Often referred to as an “ARM,” an adjustable rate mortgage is a type of home loan structured to change with prevailing interest and market conditions over time. An ARM starts with a fixed introductory mortgage rate, and once that period ends, the rate adjusts to a variable rate that fluctuates over time based on a predetermined index.
The most common type of adjustable rate mortgage is the 5/1 ARM. This type of mortgage loan offers a fixed rate for five years. After five years, the mortgage rate is recalculated annually for the remainder of the loan. Thus, “5” years of a fixed rate, followed by changes every “1” year.
It’s also important to understand that an adjustable rate mortgage has many uses. These mortgage loans can be used to purchase commercial and investment property, refinance a mortgage, and buy a single-family house.
When to Use Adjustable Rate Mortgages
Selecting an adjustable rate mortgage provides borrowers significant benefits under the right circumstances. These mortgage loans generally start with attractively low-interest rates and favorable terms. It may even come with closing cost incentives from your lender.
If You Plan to Relocate:
An adjustable rate mortgage tends to be an excellent choice for people who expect to relocate. The low mortgage rate during the introductory period can reduce monthly expenses. Securing this type of home loan positions families to sell the property before the mortgage rate changes. Through on-time repayment, the homeowner can experience a positive impact on their credit score, which can result in increased borrowing opportunities in the future.
Rising Interest Rates:
It’s difficult to predict whether interest rates will rise or fall in the coming years, and that’s why the introductory fixed mortgage rate during the initial years is so important. Borrowers can decide whether to stick with the adjustable rate mortgage or refinance if they believe interest rates will rise. The fixed interest years are a failsafe that helps homeowners avoid straining their budgets.
If You Flip Houses:
House flippers rely on cash, credit, and often adjustable rate mortgages as part of their business model. Traditionally low mortgage rates during the initial years mean these for-profit homebuyers keep expenses down and profit high. A savvy house flipper can purchase, remodel, and sell an investment property before ever coming close to a mortgage rate change.
Adjustable Rate Mortgage Loan Requirements: What do Lenders Look For?
The typical qualifying repayment terms for an adjustable-rate mortgage are based on the standard metrics listed below, which may differ by lender.
- Down Payment
- Credit Score
- Debt-to-Income Ratio
- Loan-to-Value Ratio
It's always a good idea to consult with a local mortgage lender to review where you stand on the items listed above. Consolidating debt or clearing up an error on a credit report (that you may not be aware of) can make a significant difference when applying for an ARM. A Middlesex Federal Mortgage Specialist can evaluate your situation and provide the guidance needed for you to qualify for the best option available.
How to Find the Right Adjustable Rate Mortgage Lender
There are many lenders offering loan products with various rates and repayment terms. It's important for home and investment property buyers to conduct due diligence, so they know and understand the frequency of mortgage rate changes, fees, and terms.
When researching Adjustable Rate Mortgages, be sure to contact Middlesex Federal’s Home Loan Specialist Team first. Pre-purchase reviews, guidance from trusted local specialists, and low mortgage rates for homeowners and homebuyers within our community service area are just a click away!